I am new to investing. I understand that the P/E ratio along with other data can be used to determine whether a stock may or may not be undervalued.
Are there situations where a HIGH P/E is actually beneficial? Say for instance you have a stock with a P/E of 20. If the earnings-per-share on that stock increases by $1, you would expect that if the P/E ratio remains constant then the price of the stock would increase by $20. It is somewhat counter-intuitive that a high P/E would be desirable, but it stands to reason that if the market is willing to pay 20x earnings when earnings are at X, why wouldn't the market be willing to pay 20x earnings (or perhaps even more) when earnings move to X + 1.
I think I read something along these lines in Burton Malkiel's book but I am not positive, any thoughts on this concept or research in that area I could look into? What considerations can we make with respect to whether its reasonable to assume that the P/E ratio will remain constant, increase, or decrease?
